Why Is Banana Republic Important For Gap?

by Trefis Team
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Upside
43.84
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Trefis
GPS
Gap Inc.
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Quick Take

  • Gap Inc’s Banana Republic stores offer products at higher prices than those offered by Gap and Old Navy, thus generating higher revenue per square foot.
  • Due to its limited presence and lower capital expenditure involved, Gap Inc. is expanding Banana Republic stores in the U.S.
  • These stores performed well even when the company struggled due to an imbalance in the merchandise mix.
  • Although Banana Republic‘s international presence is limited, markets such as Europe and China offer huge growth potential.

Gap Inc. (NYSE:GPS) operates in North America, Europe and Asia through its three main brands – Gap, Banana Republic & Old Navy . Banana Republic offers fashionable collections of casual and tailored apparel, shoes, accessories and personal care products for men and women at higher prices than those offered by Gap and Old Navy. [1] This adds an affordable luxury business to Gap’s arsenal.

Although we estimate that Banana Republic contributes less than 20% to Gap’s value, its store productivity is worth noting. Banana Republic stores generate revenue per square foot of around $500, which is significantly higher than Gap‘s $400 and Old Navy‘s $280. [1] While Gap Inc. is consolidating its Gap and Old Navy stores in the U.S., it is continuing with Banana Republic‘s expansion to capitalize on its growth potential. Both the U.S. and international markets offer good opportunities for the brand’s expansion due to its limited presence, lower capital requirements and high store productivity.

See our complete analysis for Gap Inc.

The U.S.: Continued Expansion, Encouraging Results And Success Of Affordable Luxury

Historically, Gap Inc. has been closing down its underperforming Gap and Old Navy stores in the U.S. to improve overall productivity. On the other hand, the number of Banana Republic stores has gone up from 527 in 2006 to 590 in 2012. [1] Banana Republic‘s geographical reach is much smaller than that of the other brands. This, along with its ability to generate high revenues with limited store space, justifies the expansion strategy. The average size of a Banana Republic store is 8,200 square feet. This figure is significantly lower than Old Navy‘s 17,000 sq. ft. and Gap‘s 10,000 sq. ft.. [1]

Additionally, Banana Republic delivered encouraging results even when Gap struggled due to an imbalance in merchandise mix. In 2011, the company’s comparable sales declined by 6% compared to only 2% decline for Banana Republic. [1] A similar trend was visible in 2010 as well.

Gap bought Banana Republic in 1983 and has successfully turned it into an affordable luxury brand with exclusive designs and luxurious fabrics. It also has been credited with making fashion more accessible. With the sluggish growth in the U.S. economy, affordable luxury has become a popular merchandise category. This is evident from the success of specialty retailer Ann Taylor (NYSE:ANN), which also sells affordable luxury apparel and accessories. [2]

International Markets: Huge Potential For Future Growth

Although Banana Republic‘s international presence is limited to just 48 stores in Asia and Europe, the store count is likely to increase in the future owing to the market potential for luxury goods. [1] Europe can be a good market for Banana Republic despite the debt crisis. Over the long run, we expect the brand to generate healthy profits from the region with an improvement in the economy and an increase in tourism. Overseas buyers are responsible for a substantial portion of luxury spending in Europe. Chinese buyers alone account for about one-third of luxury purchases in the region. [3]

China serves as a dream destination for luxury apparel and accessories retailers. High end players such as Coach (NYSE:COH) have seen tremendous success in the region. [4] A McKinsey report suggests that while Chinese consumers represented only 1% of global luxury spending in 1995, they accounted for 27% of the spending in 2012. By 2015, China is estimated to have one-third share of the global luxury market. [5] Gap Inc. will soon be debuting its Banana Republic brand in the region [6]

Our price estimate for Gap Inc. at $39, implying a premium of about 15% to the market price.

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Notes:
  1. Gap’s SEC filings [] [] [] [] [] []
  2. Ann’s SEC filings []
  3. Luxury Spending In Europe Hit By A Drop In Tourist Demand, CNBC, April 3 2013 []
  4. Coach’s SEC filings []
  5. Chinese shoppers ‘biggest spenders on luxury goods’, South China Morning Post, December 13, 2012 []
  6. Gap Eyes Launch Of Old Navy, Banana Republic Stores In China, Forbes, Oct 24 []
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